If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Neway CNC Equipment (Suzhou)'s (SHSE:688697) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Neway CNC Equipment (Suzhou) is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = CN¥294m ÷ (CN¥3.6b - CN¥2.1b) (Based on the trailing twelve months to September 2023).

So, Neway CNC Equipment (Suzhou) has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.2% it's much better.

View our latest analysis for Neway CNC Equipment (Suzhou)

Above you can see how the current ROCE for Neway CNC Equipment (Suzhou) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Neway CNC Equipment (Suzhou)'s ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 399% more capital into its operations. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Neway CNC Equipment (Suzhou) has done well to reduce current liabilities to 57% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

Our Take On Neway CNC Equipment (Suzhou)'s ROCE

The main thing to remember is that Neway CNC Equipment (Suzhou) has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 11% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we've found 1 warning sign for Neway CNC Equipment (Suzhou) that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.